The Fifth Option: Is This how Governments Will Fix Their Debt Problems?

Tuesday, July 5, 2011
By Paul Martin

by Gail Tverberg

We have all read about the standard “fixes” for a governmental debt problem – (1) inflate your way out of the problem, (2) cut programs and/or raise taxes, and (3) restructure debt, perhaps delaying repayment and giving bondholders a “haircut” on promised payouts.
A fourth one seems to circulate through peak oil circles, namely “debt jubilee”. It seems to me that there is really a fifth option as well, and that is the one that may actually get used more this time around, at least in some parts of the world. The fifth one is “do a disappearing act.” The government in question folds up, and maybe a new government is formed, or maybe not. If debt is really a problem, the new government would not take on the obligations of the previous government.

The country that exemplifies the “do a disappearing act” is the Former Soviet Union, but there are other examples as well. Both Czechoslovak Socialist Republic and the Socialist Republic of Yugoslavia broke up as well, about the same time. In the case of Yugoslavia, a war was involved, but in the other cases the breakup was relatively peaceful.

It takes energy and money to maintain a country that covers a large area. If energy is cheap, then it is easier to provide needed services–economic growth is higher, costs of transporting goods long distances are lower, and collecting taxes works better. As long as a country is growing economically (especially if there is job growth to go with the economic growth), then it is easy to collect rising amounts of tax dollars, because the tax code that is in place provides rising tax revenues simply because of income growth, without formally raising taxes.

The Rest…HERE

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